On Friday, the Compensation Scheme of Last Resort (CSLR), in collaboration with independent actuaries Finity, released its initial levy estimate for the upcoming financial year, revealing a staggering total of $78 million across all sectors, with the bulk or $70.11 million charged to financial advisers.
The CSLR, designed to compensate consumers who have suffered financial loss due to misconduct by financial services providers, has become a contentious issue for financial advisers, who are facing significant levies despite not being involved in the wrongdoing.
While CSLR levies are collected from various subsectors, including credit intermediaries, credit providers, licensees and securities dealers, financial advisers have borne the brunt of the burden since the scheme’s inception last year.
For instance, financial advisers were asked to fork out $18.5 million in this financial year, while credit providers were charged $1.5 million, credit intermediaries $1.8 million and securities dealers $2.3 million.
Now that the cost has surpassed $70 million – well above the $20 million sector cap, which the minister has the discretion to raise – the sustainability of the CSLR scheme is under increasing scrutiny.
In a statement on Friday, Financial Services Minister Stephen Jones announced that the Albanese government is instructing the Treasury to conduct a comprehensive review of the CSLR.
“This is all about ensuring the scheme remains sustainable into the future for consumers and for the industry,” Jones said, although he did not provide any time frames for when this review would take place.
While emphasising his focus on consumers, Jones, who announced his resignation from politics on Thursday, highlighted the importance of financial advice, noting that Australians require access to affordable, high-quality advice.
“Ensuring the scheme is sustainably funded will be an important focus of the review,” the minister said.
Quick to react to the CSLR’s cost blowout was Stockbrokers and Investment Advisers Association’s (SIAA) CEO Judith Fox, who said the latest estimate shows “the scheme is unsustainable and risks impacting the entire financial services industry more broadly”.
“The annual levy cap for the financial advice sector is $20 million. Today’s report released by the scheme shows that the proposed levy for the sector will total $70 million. For the cap to be exceeded by such a large amount means that the current scheme is not working as intended and change is urgently needed,” Fox said.
“We support a scheme that compensates genuine victims of wrongdoing but the way the scheme has been designed is unsustainable and requires a rethink,” she added.
Fox called for the government’s review to be done on an urgent basis, noting that “changes need to be made to the way the scheme is designed sooner rather than later to put it back on a sensible and sustainable footing”.
Similarly, the CEO of the Financial Advice Association Australia (FAAA), Sarah Abood, said a figure of $70 million represents “an existential threat for financial advice in this country”.
“If the government’s intention is to bankrupt financial advisers in every town and every suburb and rapidly increase the already-high cost of advice, this is an easy way to do it,” Abood said.
“The government surely must now see that the writing is on the wall and that it must fix CSLR immediately.”
While Abood welcomed the government’s announcement of a comprehensive review, she noted that the government has been aware of the scale of the problem since November 2022, following the loss of $368 million by 4,606 Dixon Advisory clients.
“The problems with the CSLR are known, and urgent. In the context of a looming federal election, we urge the minister to act now on the fixing the issues that are within his power to resolve.”
The CSLR, established in April 2024 following recommendations from the Ramsay review and the royal commission, can pay up to $150,000 to eligible consumers with an unpaid Australian Financial Complaints Authority (AFCA) compensation determination in one of four areas: personal financial advice, credit intermediation, securities dealing or credit provision.
Of the $78 million estimated cost of the scheme for FY2025–26, while $70.11 million is attributed to financial advice, only $2.80 million is credited to provision services, $2.72 million to credit intermediaries and $2.34 million to the securities dealing subsector.
According to the CSLR, these funds will support the processing of 1,800 claims across both the pre-CSLR levy and the FY25–26 levy estimate, as well as compensation payments for 491 claims tied to the FY25–26 levy – marking a threefold increase in processing volume compared with FY24–25.
The Australian Securities and Investments Commission is only authorised to levy up to $20 million at a subsector level.
“The amount above $20 million will require funding via a special levy with formal notification of this requirement to be made to the Minister for Financial Services early in FY26,” the CSLR said.
“Consistent with the legislation, CSLR will complete a revised levy estimate for FY26. The consideration of any special levy will be determined by the minister and subject to separate parliamentary approval.”
In a statement, CSLR chief executive David Berry said the “key contributors driving the expected number of claims” are United Global Capital (UGC) and Dixon Advisory.
Indeed, 92 per cent of expected claims paid for FY25–26 are from the two failed firms.
While the bulk of the focus around the CSLR has been on Dixon Advisory, the impact of UGC on the FY25–26 estimate is far greater at $44.57 million compared to $12.25 million for Dixon.
Importantly, the estimate is based on a range of actuarial assumptions around the ultimate number of UGC complaints that AFCA receives – UGC must remain a member until at least 31 May 2025 – the speed with which AFCA processes complaints and the average claim size of the complaints.
Time to scrap ’but for’
Over the past year, industry experts have questioned whether AFCA’s use of “but for” determinations, which include hypothetical missed gains, should be covered under the CSLR, arguing that the scheme should focus solely on actual losses, not opportunity costs, to prevent an unsustainable burden on the advice sector.
In a statement on Friday, Blake Briggs, CEO of the Financial Services Council, called for the government’s review to address whether the scheme should prioritise compensating consumers who’ve incurred actual losses over those who’ve benefited from capital gains.
“It does not align with community expectations that 80 per cent of the compensation being paid by the scheme has been for foregone, hypothetical capital gains, not the actual losses a consumer has incurred,” Briggs said.
AFCA has previously defended the use of the “but for” approach, highlighting that the standard actually predates AFCA’s existence.
Namely, the Supreme Court of Western Australia ruled in favour of the approach back in 2015, when Patersons Securities launched action against the Financial Ombudsman Service.
However, FAAA’s Abood late last year said that while AFCA’s methodology is not new, how it interacts with the CSLR is.
“I think, certainly from our perspective, it seems completely unfair, but also obviously unsustainable,” she said.
“That a compensation scheme of last resort should be paying, basically an income guarantee to those clients. So, the floor is not you’ve lost money. The floor is maybe you could have done a bit better in the Vanguard balanced fund, so here’s $150,000, and that’s where the anger is.”
